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FHA Loans- Afford ability Solutions for First Time Home buyers
Author: Jared Martin
"FHA" and "First Time Home buyers" are real buzzwords as far as home buying is concerned,
especially when those terms are used in combination. Many readers have heard the "FHA loans are
great for first time home buyers" street talk, but without detailed, supporting information as to why.
The intent of this article is to quantify the features of this loan, both good and bad, and discuss the
circumstances under which it's a beneficial program to the home buyer (either first, second, or third
time home buyer).
First, FHA stands for Federal Housing Authority, and though the phrase "FHA loan" implies otherwise,
the Federal Housing Authority does not lend money. Rather, they insure the loan. The money still
comes from the lender selected by the borrower, but the FHA now provides an insurance policy to
protect the lender in the event of borrower default. With this insurance, the lender has less risk, and so
guidelines are less restrictive than with conventional financing.
The reader should be aware that FHA is completely different from Fannie Mae and Freddie Mac
(otherwise known as goes, or "Government Sponsored Entities"). There has been a lot of buzz recently
about Fannie and Freddie, but these entities, and the associated loans, are completely different than
the Federal Housing Authority.
Recent events in the credit markets have made the FHA loan a true Afford ability solution for buyers. In
fact, it is this author's opinion that without the availability of this loan, there would be very few people
buying houses these days.
In mid-December of last year, a report began circulating amongst all the direct lenders citing "counties
of declining market value" throughout the country. This report placed counties in one of 3 categories: 1)
par (little or no depreciation in home values), 2) soft (significant depreciation), or 3) distressed
(extreme depreciation). Since that time, the report, and the consequence to lending guidelines, has
been revised and updated.
Where things currently stand is that lenders mandate a 5% LTV reduction for soft market, and a 10%
LTV reduction for distressed markets. LTV stands for "loan-to-value", and refers to the maximum
amount of financing (as a ratio to the sales price) the lender will allow. So, for example, if a loan
program in a "par" market allowed 90% financing, that same loan program in a distressed market
would only allow 80% financing.
Since most counties in major metropolitan areas are on this list, hefty down payment requirements are
placed on borrowers purchasing homes in these areas. On average, this means 10% down payment
requirements in par markets, 15% down payment requirements in soft markets, and 20% down
payment requirements in distressed markets.
But this is where FHA loans provide a saving grace, as these loan programs are not subject to this
"LTV reduction". Rather, it is only the non-government loan programs (ie Fannie Mae and Freddie
Mac) subject to this constraint. Further, FHA loans allow up to 97.75% LTV (so 2.25% down payment).
On a $450,000 home in a soft market, this means the borrower only has to put down $10,125 instead
of $67,500 on a non-government loan.
The other major benefit of the FHA program is the reduced credit requirements. Whereas
non-government loans require credit scores of 700+, the FHA loan accepts credit scores as low as
640.
Is there a catch to all this? Somewhat. The FHA loan carries a mandatory Mortgage Insurance
Premium of 1.5% of the loan amount that must be paid at settlement; on a $400,000 loan, 1.5% would
be $6,000. This will change to 1.25-2.25%, depending on the borrower's financial strength, when the
new FHA guidelines are released July 14, 2008.
However, even with the 1.5% Mortgage Insurance Premium, the total "down payment" required from
the buyer (2.25% + 1.5%= 3.75%) is less than with a non-government program (10% in a best case
scenario). True, the additional 1.5% fee is not going towards equity, like a down payment, but the total
out-pocket expense is still less.
Another "catch" to the FHA loan is that, assuming the borrower does the 97.75% financing (or at least
anything above 78%), the borrower will have to pay Monthly Mortgage Insurance (MMI). MMI is similar
to PMI (Private Mortgage Insurance on non-government loans). However, the MMI payment of 0.50% of
the loan amount is slightly less than a PMI payment would be for the same loan amount.
But is MMI or PMI really a bad thing? Before January 2007 it was, since it was not tax deductible. But
as of January 1, 2007, following the "Tax Relief and Health Care Act of 2006" which President Bush
signed into law, mortgage insurance premiums are now tax deductible. Before this time, buyers
wanting financing in excess of 80% got a second mortgage to avoid MMI or PMI (and 2nd mortgages,
when used for a purchase, are tax deductible). But with the new tax law, the mortgage insurance
premium carries the same tax benefit as a second mortgage. Thus MMI can be thought of as a
"second mortgage".
And lastly, another "catch" to the FHA loans is they do take slightly longer to process. The reason is
that there is more paperwork, steps, and procedures for the lender to go through then with
non-government programs. In total, this means about 10 extra calendar days to the process, so 35-40
days instead of the usual 25-30. What I tell home buyers making an offer on a home and planning to
use FHA financing is to simply request a 40-45 day escrow instead of the usual 30. In this market, with
sellers eager to sell, this is never a problem.
And those are the "catches" to the FHA loan, but minor if not insignificant in this author's opinion. Truly,
the only real thorn in the "FHA rose" is the 1.5% Mortgage Insurance Premium. And for borrowers that
have the assets to afford a 15%+ down payment, I tell them to use conventional financing, so they can
avoid this Mortgage Insurance Premium (and also qualify for a better rate with the larger down
payment).
Speaking of rate, the reader may be envisioning a monster rate for this government loan program. But
the rates are in fact quite modest. As of mid-may, wholesale rates on an FHA loan with 97.75%
financing (2.25% down) were about 6.00%, compared with 5.625% on a conventional loan with 80%
financing.
Thus, with the 15-20% down payment requirements of conventional loans for houses in "areas of
declining market value", FHA loans are a great resource for home buyers unable to afford these large
down payments. And since the FHA loan limit has been raised as high as $729,750 in some areas, the
applicability is even broader. Yes, there are a few "catches" to this loan program, but overall the pros
outweigh the cons for the borrower with limited assets.
Article Source:
http://www.articlesbase.com/mortgage-articles/fha-loans-affordability-solutions-for-first-time-homebuyer
s-441686.htmlAbout the Author:Jared Martin is President and CEO ofGOTeHomeLoans, Inc. , an
Upfront Mortgage Broker Firm serving CA, DC, MD, VA, and PA. Questions and comments can be
emailed to Jared atjaredm@gotehomeloans.com .
Author: Jared Martin
"FHA" and "First Time Home buyers" are real buzzwords as far as home buying is concerned,
especially when those terms are used in combination. Many readers have heard the "FHA loans are
great for first time home buyers" street talk, but without detailed, supporting information as to why.
The intent of this article is to quantify the features of this loan, both good and bad, and discuss the
circumstances under which it's a beneficial program to the home buyer (either first, second, or third
time home buyer).
First, FHA stands for Federal Housing Authority, and though the phrase "FHA loan" implies otherwise,
the Federal Housing Authority does not lend money. Rather, they insure the loan. The money still
comes from the lender selected by the borrower, but the FHA now provides an insurance policy to
protect the lender in the event of borrower default. With this insurance, the lender has less risk, and so
guidelines are less restrictive than with conventional financing.
The reader should be aware that FHA is completely different from Fannie Mae and Freddie Mac
(otherwise known as goes, or "Government Sponsored Entities"). There has been a lot of buzz recently
about Fannie and Freddie, but these entities, and the associated loans, are completely different than
the Federal Housing Authority.
Recent events in the credit markets have made the FHA loan a true Afford ability solution for buyers. In
fact, it is this author's opinion that without the availability of this loan, there would be very few people
buying houses these days.
In mid-December of last year, a report began circulating amongst all the direct lenders citing "counties
of declining market value" throughout the country. This report placed counties in one of 3 categories: 1)
par (little or no depreciation in home values), 2) soft (significant depreciation), or 3) distressed
(extreme depreciation). Since that time, the report, and the consequence to lending guidelines, has
been revised and updated.
Where things currently stand is that lenders mandate a 5% LTV reduction for soft market, and a 10%
LTV reduction for distressed markets. LTV stands for "loan-to-value", and refers to the maximum
amount of financing (as a ratio to the sales price) the lender will allow. So, for example, if a loan
program in a "par" market allowed 90% financing, that same loan program in a distressed market
would only allow 80% financing.
Since most counties in major metropolitan areas are on this list, hefty down payment requirements are
placed on borrowers purchasing homes in these areas. On average, this means 10% down payment
requirements in par markets, 15% down payment requirements in soft markets, and 20% down
payment requirements in distressed markets.
But this is where FHA loans provide a saving grace, as these loan programs are not subject to this
"LTV reduction". Rather, it is only the non-government loan programs (ie Fannie Mae and Freddie
Mac) subject to this constraint. Further, FHA loans allow up to 97.75% LTV (so 2.25% down payment).
On a $450,000 home in a soft market, this means the borrower only has to put down $10,125 instead
of $67,500 on a non-government loan.
The other major benefit of the FHA program is the reduced credit requirements. Whereas
non-government loans require credit scores of 700+, the FHA loan accepts credit scores as low as
640.
Is there a catch to all this? Somewhat. The FHA loan carries a mandatory Mortgage Insurance
Premium of 1.5% of the loan amount that must be paid at settlement; on a $400,000 loan, 1.5% would
be $6,000. This will change to 1.25-2.25%, depending on the borrower's financial strength, when the
new FHA guidelines are released July 14, 2008.
However, even with the 1.5% Mortgage Insurance Premium, the total "down payment" required from
the buyer (2.25% + 1.5%= 3.75%) is less than with a non-government program (10% in a best case
scenario). True, the additional 1.5% fee is not going towards equity, like a down payment, but the total
out-pocket expense is still less.
Another "catch" to the FHA loan is that, assuming the borrower does the 97.75% financing (or at least
anything above 78%), the borrower will have to pay Monthly Mortgage Insurance (MMI). MMI is similar
to PMI (Private Mortgage Insurance on non-government loans). However, the MMI payment of 0.50% of
the loan amount is slightly less than a PMI payment would be for the same loan amount.
But is MMI or PMI really a bad thing? Before January 2007 it was, since it was not tax deductible. But
as of January 1, 2007, following the "Tax Relief and Health Care Act of 2006" which President Bush
signed into law, mortgage insurance premiums are now tax deductible. Before this time, buyers
wanting financing in excess of 80% got a second mortgage to avoid MMI or PMI (and 2nd mortgages,
when used for a purchase, are tax deductible). But with the new tax law, the mortgage insurance
premium carries the same tax benefit as a second mortgage. Thus MMI can be thought of as a
"second mortgage".
And lastly, another "catch" to the FHA loans is they do take slightly longer to process. The reason is
that there is more paperwork, steps, and procedures for the lender to go through then with
non-government programs. In total, this means about 10 extra calendar days to the process, so 35-40
days instead of the usual 25-30. What I tell home buyers making an offer on a home and planning to
use FHA financing is to simply request a 40-45 day escrow instead of the usual 30. In this market, with
sellers eager to sell, this is never a problem.
And those are the "catches" to the FHA loan, but minor if not insignificant in this author's opinion. Truly,
the only real thorn in the "FHA rose" is the 1.5% Mortgage Insurance Premium. And for borrowers that
have the assets to afford a 15%+ down payment, I tell them to use conventional financing, so they can
avoid this Mortgage Insurance Premium (and also qualify for a better rate with the larger down
payment).
Speaking of rate, the reader may be envisioning a monster rate for this government loan program. But
the rates are in fact quite modest. As of mid-may, wholesale rates on an FHA loan with 97.75%
financing (2.25% down) were about 6.00%, compared with 5.625% on a conventional loan with 80%
financing.
Thus, with the 15-20% down payment requirements of conventional loans for houses in "areas of
declining market value", FHA loans are a great resource for home buyers unable to afford these large
down payments. And since the FHA loan limit has been raised as high as $729,750 in some areas, the
applicability is even broader. Yes, there are a few "catches" to this loan program, but overall the pros
outweigh the cons for the borrower with limited assets.
Article Source:
http://www.articlesbase.com/mortgage-articles/fha-loans-affordability-solutions-for-first-time-homebuyer
s-441686.htmlAbout the Author:Jared Martin is President and CEO ofGOTeHomeLoans, Inc. , an
Upfront Mortgage Broker Firm serving CA, DC, MD, VA, and PA. Questions and comments can be
emailed to Jared atjaredm@gotehomeloans.com .
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